Pensions Will Sink Connecticut

Pensions Will Sink Connecticut

By: Joe DeLong, CCM Executive Director

The Connecticut Conference of Municipalities (CCM) is keenly aware that public pensions are rapidly draining the vitality of our State. Our large cities are drowning in unfunded pension liabilities; seven cities have to pay off about $900 million in pension obligation bonds. Annual required contributions to more than 200 local plans are crowding out needed investments in education and infrastructure. With local budgets heavily dependent on property taxes, it’s impossible to talk about property tax relief without addressing pension liabilities.

It’s no different at the State level, where the problems of the Teachers’ Retirement System (TRS) and State Employee Retirement System (SERS) have been widely publicized.

CCM recently formed a Pension Liabilities Task Force, and that group has been quietly meeting, gathering information, working with our consultant, and exploring options. We suspect asset transfers, dedicating lottery proceeds to pensions, or extending amortization periods will only blow holes in other parts of the budget and push more liabilities to future generations. THERE ARE NO EASY SOLUTIONS!

We desperately need honest, tough discussions, just like the 1983 negotiations between President Reagan and Congress on Social Security. Back then, we knew that unfunded legacy liabilities had left Social Security basically broke and an even bleaker future loomed when Baby Boomers retired. The eventual compromise increased contributions from employees and employers, phased in longer working careers, and made numerous other changes. Basically, Baby Boomers funded the legacy liabilities and their own future retirements.

At state levels, Wisconsin made hard choices in the 1970s, merging its state and local plans, developing risk-sharing, and creating a modern pension system. Today, Wisconsin calculates liabilities with a 5.5 percent discount rate (lower than any other state uses); it maintains roughly 100 percent funding; it distributes COLAs to retirees based on market performance; and it keeps contribution rates at 13.2 percent (shared by employees and employers).

Every other state, including Connecticut, has avoided hard choices on pensions.

Our state and (some) local plans have employed an array of actuarial techniques to keep annual contributions as low as possible and push required contributions onto future generations. Constant news reports chronicle the departure of our citizens for lower tax environments. Facing ever-increasing taxes and no global solution to our pension conundrum, they are simply declining to pay for those decades-old decisions.

Here’s some really bad news. The long-term investment cycle may have caught up to us. Recent projections from Vanguard (with more assets under management than all American public pension plans combined) declared that “our expected return outlook for U.S. equities over the next decade is centered in the 3%–5% range, in stark contrast with the 10.6 percent annualized return generated over the last 30 years.”

If these projections prove reasonably accurate, our public pensions are toast, with TRS required contributions destroying the State budget within six years.

Here’s some really bad news. The long-term investment cycle may have caught up to us.

CCM’s Task Force has debated options such as merging the 206 local plans with the Connecticut Municipal Employee Retirement System (CMERS). Well-funded local plans would want something in return, such as assurance that the large state plans will be stabilized and income taxes won’t be raised. Merging all state and local plans would produce a Wisconsin-like fund with at least $40 billion in assets — enough to make low interest loans to water systems to meet the $8.6 billion civil engineers estimate is needed for drinking water and wastewater treatment over the next 20 years.

Public entities in CMERS were recently notified by The State Retirement Commission that it is lowering the long-term expected return on assets assumption from 8.00 to 7.00 percent, which will lead to an immediate increase of 15-20 percent in municipal employer contributions. Without changes to CMERS, the current system is unsustainable for participating entities and will put even more pressure on an already stressed property tax system.

We hope Governor Lamont will charge a larger task force of stakeholders to create a shared risk pension model and a transition plan. CCM is ready, willing and able to share some concrete solutions with the Governor and stakeholders, as addressing pension liabilities must be the top priority in resolving Connecticut’s fiscal crisis.